He started investing at the end of 1972 with $100,000, right before the US market fell almost 50% over the next year.

He then invested $100,000 in 1987 (after 15 years of saving), right before the market lost over 30%.

His bad luck continued: He invested $100,000 at the end of 1999, just to see the market lose half its value again.

His final investment before he retired was made in 2007, where he invested the $100,000 he had been saving since 2000. The markets delivered him another >50% loss.

Poor Bob was also unlucky in life.

At the beginning of 2009, after the markets were down 51% since his last investment, Bob was on a ski vacation and had a bad fall. He needed to have a hip replacement, and when he got home, found that his house had burned down.

Bob looked to his investment portfolio and was surprised to discover that he was actually a multi-millionaire - $2.44 million to be exact. He made 6.1x his money despite his terrible luck with a 7.98% annualised return (IRR).

Thinking about inheritance, Bob did not touch his hilariously poorly timed investments and instead decided to live with his children and claim insurance for his hip replacement. As of end September 2018, Bob’s holdings would be worth $11.8 million, 29.6x his initial investment, with a 10.28% annualised return (IRR).

Bob wasn’t such a schmuck after all. He saved diligently and never panicked, which allowed the power of compounding to work for him.

In fact, Bob did a lot better than many of us. According to JP Morgan’s Guide to Markets, the average investor had a 20-year annualised return of 2.6% as of June-end 2018, likely due to speculation and poor investment behaviour.

Market timing is the holy grail of money-making - who doesn’t want to buy low and sell high? But it is impossible to get right consistently. You’re investing for the next decade or two, not the next month or year. When the powerful financier J.P. Morgan was asked what the stock market would do next, his answer was “It will fluctuate.” Look at the long-term trajectory of the markets rather than short-term fluctuations.

It’s about time in the markets, rather than timing the markets.

If you hold cash for long enough, you will eventually see markets decline. But you’re betting that you know when the markets are near a peak or trough, and that the pullback will compensate you for the close-to-zero return you’ll get sitting in cash, and that you’ll have the discipline to put money back to work when it falls by a certain level, even if everyone else is taking it out.

Pundits have been predicting for years that a market crash is right around the corner. They’ll eventually be proven right because that’s how markets function. Worrying about investing at the peak of the market is distracting you from what you should really be thinking about: positioning yourself in the markets for the long-term to have the greatest chance of success.

We can all retire as multi-millionaires

It may feel almost too overwhelming to think about saving a million dollars for retirement, especially when it’s still decades away.

TAKEAWAY OF THE WEEK

You can’t just wake up one morning and decide to run a marathon. You set yourself a series of smaller goals before you can get there - from dragging yourself out of bed every morning to train, to building up your stamina and adding more miles to each run.

The same philosophy can be applied to saving for retirement. It may feel almost too overwhelming to think about saving a million dollars for retirement, especially when it’s still decades away.

Time matters.

Time is your biggest ally here in building up a retirement nest egg. Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” Here is what setting a series of smaller savings goal can get you:

Age 22: You’ve just entered the workforce with a monthly salary of $3,400 and two months of annual bonus (median salary for fresh graduates in Singapore). You save 24% of your salary (average savings rate in Singapore) and have made the smart decision of investing your savings into an 80% stocks and 20% bonds portfolio.

Age 29: By diligently investing your savings every month, you have now reached your first small goal of saving over $100,000.

Age 40: You have just hit the $500,000 mark.

Age 47: Congratulations! You are now officially a millionaire.

Age 60: The effects of compounding have snowballed. You have now saved over $3 million.

Age 65: It’s time to enjoy the fruits of your labour - you can retire with a nest egg of over $4.5 million. Assuming annual inflation rates of 3%, this is equivalent to ~$1.26 million in today’s money. For Singaporeans, this excludes what you have in your CPF, where you have been saving 37% of your monthly salary until you were 55. Imagine how much more you could have to spend in your retirement if you had invested part of this.

This assumes your annual salary increases 3% per year and annualised long-term returns of ~7% per annum for your 80% stocks and 20% bonds portfolio. Returns in any given year are far from average, but we are investing over the long-term. As a reference, the average annualised returns for the S&P 500 since its inception in 1928 is ~10%.

There’s a nifty math shortcut to see approximately how long it will take to double your portfolio - just divide 72 by your rate of return. I.e. if you can earn an annualized return of 7.2% on your portfolio, you will double your money every 10 years.

Doubling your money every 10 years by taking some market risk is totally doable.

Unfortunately, you can’t just wake up one morning and decide to be a millionaire today, a year later, or even 5 years later. Your get-rich-quick plan probably isn’t going to materialize. We have written about the impending pension crisis and how we should all prepare better for our retirement. (You can read about it here).

Start small. Start early.

Harness the power of time in the markets and the snowball effect of your money working for you.

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Don’t worry - you can still undo some of these retirement planning mistakes

Some decisions are more important than others. Time is of the essence and you don’t really get a second chance once you hit retirement.

“Experience is the name everyone gives to their mistakes.” – Oscar Wilde

TAKEAWAY OF THE WEEK

We’ve all been there - bad haircuts, poor fashion choices, regretful hookups. For the most part, we’ve put these poor decisions behind us, even if Facebook continuously reminds us of these “memories”.

Some decisions are more important than others. When it comes to planning for retirement, the earlier you start, the better off you will be. Time is of the essence and you don’t really get a second chance once you hit retirement.

Here are some retirement planning mistakes to avoid:

1. Not having a plan

The sad reality is that we probably spend more time planning our next vacation than planning how we will live (and pay for) the last three decades of our lives. One in three working Singapore adults is not planning for his or her retirement, according to a survey by Nielsen. Figure out, reasonably and roughly, the cost of your desired lifestyle in today’s money. Write it down. This is a good place to start.

2. Not starting early

Life gets in the way - you have a mortgage, kids’ education, bucket list holidays to pay for. We get it. We are not telling you to cut down on spending. But you should implement your investment plan so that you benefit from your most valuable and finite asset of all - time. It's no surprise that 66% of retirees in Singapore wished they had started planning for retirement earlier. Don’t play catch up - start early and let time be on your side. Read more in our article here.

3. Not investing intelligently

Investing poorly will do you more harm than good, and probably make some brokers and salespeople happy along the way. Diversify, keep your costs low, and be mindful of the level of risk you are taking. Though markets have historically rewarded investors who have stayed invested over the long-term, we are our own worst enemy. If you invest more aggressively than you can stomach, you will struggle to stay invested when markets inevitably turn against you, and most likely buy high and sell low. Hoarding cash is also a poor idea as inflation will slowly but surely eat away at your wealth. A Blackrock survey concluded that Singaporeans rely too heavily on cash in their investment portfolios, which creates a significant gap between current holdings and financial goals.

Form a long-term investment plan with an asset allocation that is appropriate for your risk tolerance, review it regularly and keep track of your progress towards reaching your goal. If this all sounds too overwhelming, find a financial advisor that can help.

If you are based in Singapore, we at endowus, a MAS-licensed financial adviser, can help. Get in touch here.

An alarming 65% of retirees in Singapore do not expect their savings to last throughout retirement. (Source: Channel News Asia) You want to be sailing off into the sunset or hitting birdies at the golf course in the last decades of your life. Not struggling to pay your bills and worrying about outliving your retirement savings.

What keeps you up at night? It really should be the global pension crisis

In 2050 the world will have a $400 trillion dollar shortfall in providing income to its old age citizens. That’s a really scary thought.

"We are more disturbed by a calamity which threatens us than by one which has befallen us."​- John Lancaster Spalding

TAKEAWAY OF THE WEEK

When I was growing up, the biggest threat to our future was the seemingly imminent nuclear war between the Cold War antagonists - the United States and the Soviet Union. After the fall of the Berlin Wall, we moved onto the threat of melting ice caps in the North Pole, huge earthquakes and tsunamis engulfing major cities and nations, and a meteor eventually wiping out humanity. We have lived with the fear of an unknown event that will end humanity for as long as I can remember. However, the biggest impending threat isn’t some environmental disaster like an earthquake or a meteor strike, nor is it the threat of a nuclear war breaking out. It is the global pension crisis.

An ageing population driven by longer life expectancies and lower birth rates has caused the dependency ratio – the ratio of retirees to active labour force – to move steadily higher across the world. In 1950, 10% of the working population was 65 or above in the world’s largest economies. Today, this number is 25%. By 2050, it will be 50%.

Imagine working your entire life as a responsible citizen. You retire at age 65, and many of your friends slowly leave the workforce as well. You have worked hard and are promised a retirement income from your government or employer. You are now 75 and have just been told that the tap has run dry. You and your friends will now have to start living on one-third of what was promised until you die. The cost of living and healthcare have been increasing, but you cannot go back to work and you do not want to be a burden on your children. Your lifestyle and healthcare suffer as you live out your life.

Despite people living and staying physically active for longer, there has been no change in the official retirement age, which ranges between 60 and 65 around the world. As a result, many public and private pension plans are increasingly under-funded and will fall short of supporting the ageing population. Pension systems now have to pay benefits for two to three times longer than for what they were originally designed. There are three main sources of income during retirement: government-sponsored pensions, work or occupational pension plans, and personal savings. We are seeing increasing shortfalls across the board from all three sources of future income.

A 2016 Citibank report showed the 20 largest OECD countries alone have a $78 trillion shortfall in its public pensions, equivalent to 1.8 times the value of these countries’ collective national debt. Private pensions are not much better: the US has an 82% funding rate ($3 trillion shortfall) and the UK has a 68% funding rate ($1 trillion shortfall). The companies comprising the S&P 1500, the most profitable companies in the United States, have pension schemes that are underfunded to the sum of $286 billion. (Source: Mercer)

Remember that this is only the crisis facing the richest parts of the world.

By 2050, the total gap in global pension funding (including the two most populous countries in the world - China and India, which face the same long-term problems) is predicted to be a staggering $400 trillion. This is roughly five times the size of the global economy today.

Source: World Economic Forum

These structural challenges are exacerbated by economic trends such as job displacement and income pressure from technological advances, and in turn that people may not be able to save as much. This is further hampered by the extended period of low interest rates that have dampened returns and income. In fact, an OECD report showed that people retiring today can expect half the income of those who became pensioners at the start of the millennium.

While Singapore has arguably one of the best-funded public pension programs in the world, the Central Provident Fund (CPF), it will fall short of providing a secure retirement income for everybody. CPF is a defined contribution pension scheme with one of the highest savings rates in the world, a major employer contribution component, and also has a government guaranteed yield that sets a floor to returns. However, the bulk of the savings will sit in the Ordinary Account, generating a guaranteed 2.5% return, which clearly will not be enough to fund long-term retirement income needs. While Singaporeans are blessed to have the CPF as a backstop, most people will need to supplement their income in retirement from other sources such as personal savings and private pension plans. It is already more common to see people working in their old age to supplement income. The median income level of the 60-65 years age bracket is surprisingly also below that of the 20-25 year age bracket in Singapore.

We must and can take steps to better prepare for our financial future. This includes improving financial literacy through education or greater use of technology and automation to improve the process. Through these efforts, we can help people develop a long-term retirement income plan, especially from a younger age. This is critical to our survival, not only individually, but as a society. Yes, nuclear war or a meteor strike is scary, but imagine living in poverty for 25 years after retirement. Imagine the whole world reaching 2050 with a $400 trillion dollar shortfall in providing income to its old age citizens. That’s a really scary thought.

Getting to that money/hammock moment

While research has shown that passive investing makes sense for part of your stock portfolio, we think it’s a different story for bonds.

TAKEAWAY OF THE WEEK

Warren Buffett thinks that the smartest thing your money can do is climb into a hammock and take a nap. (Of course, he’s smarter than us so he doesn’t do this personally.) While research has shown that passive investing makes sense for stock investing, we think it’s a different story for bonds.

Let’s look at the numbers: Over the past 10 years in the US, the median active bond fund manager has outperformed the median passive bond fund by 0.80% per annum after fees (a meaningful amount). This is compared to the underperformance of the median active stock fund manager versus the median passive stock fund of 0.56% per annum.

We would love to embrace Warren Buffett’s romantic laissez-faire view on investing in its entirety, but as evidence-based investors, we think a little more work is required before shutting both eyes and dozing off.

Not all asset classes and markets are created equally. The bond market is a different animal from the stock market in many ways:

1. Irrational players.

There are ‘noneconomic’ players moving huge amounts of money that do not always act rationally in the economic sense. Central banks prioritize their country’s growth and inflation mandates over portfolio returns. For example, when central banks implemented quantitative easing policies, they bought their own government bonds to boost spending in order to reach inflation targets and stimulate economic growth. This ‘irrationality’ affects the market.

2. Bonds are rated.

In the stock market, the price of a stock reflects all known information on the company. For some reason, we humans decided not to place our trust in the power of markets when it comes to bonds - we allow ratings issued by organisations to help the world decide the ‘quality’ of a company’s bond. Funnily enough, these ratings almost always lag changes in a company’s bond price, which means that the market participants see the changes in a company’s fundamentals before the rating agencies can get around to changing their laggard ratings.

Benchmark indices have to track these imperfect ratings religiously, which is inefficient. We prefer to leverage on the collective wisdom of the market and use the information in prices, as we do for stocks. This means having someone in the driver seat of our bond portfolio so we are not stuck behind an old smoke-spewing truck (the rating agencies and indexes that must adhere to their judgement) when the light turns green.

3. The (lack of) fees.

The general rule is that if fund managers can get away with high fees, they will. Luckily for us, over the years they have lost the ability to justify their high fees due to a lack of outperformance, which has put downward pressure on their share of the pie. The fee dispersion between active and passive managers in bonds is much smaller than in equities, and at a level where active bond fund managers are taking home less (in their fees) than their median outperformance over their benchmarks.

Less is more. Why In-N-Out works

I recently tried to shop on Lazada. I typed ‘cushion’ into the search box, and it returned 963,138 items. Did I want the nautical stripes, flamingo..

“I'll have a DOUBLE-DOUBLE, FRENCH FRIES, and a VANILLA SHAKE”-me, making easy decisions

TAKEAWAY OF THE WEEK

I recently tried to shop on Lazada. I typed ‘cushion’ into the search box, and it returned 963,138 items. Did I want the nautical stripes, flamingo print or geometric shapes? I gave up after scrolling to page 3. All these choices and all these decisions - and all I wanted to do was buy one cushion.

Turns out, I’m not alone. More options do not always equal better choices and can often lead to inaction. There was a study done by Columbia Professor Sheena Iyengar on the effects of increasing the amount of choices for consumers. She set up a table displaying gourmet jam, and changed it periodically to either 6 varieties or 24 varieties. There were more customers intrigued by the larger selection, but when the time came for people to actually open their wallets, those who saw the smaller display were 10x more likely to buy jam.

Professor Iyengar found that the same phenomenon applied to investing in retirement plans. She discovered that when a US retirement 401(k) plan offered only 2 investment options, 75% of employees participated. But when 59 investment options were available, the participation rate dropped to 61%. Interestingly, for every additional 10 investment options available, the average 401(k) participant’s equity allocation fell by 3.28%. (Source: Business Insider)

Investing today comes with many choices. There are over 4000 ETFs and 8000 mutual funds globally, and that’s just a start. When you add in all the share classes, there are over 25,000 fund options. Logically it seems that we are better off being able to choose from thousands of funds - or cushion covers.

What we need is fewer, better investment options. Offering model portfolios and taking asset allocation decisions out of the hands of retirement plan participants has proven to be beneficial. In a study done by John Hancock Retirement Plan Services, they found that those who invested in a single asset allocation portfolio earned better returns on average than participants who picked individual investment options to build their own portfolios— by an average of 1.06% annually over 15 years. That is a 43% difference on a portfolio earning an annualized return of 7% vs. 8.06% for 15 years. (Source: Investment News)

This is the paradox of choice: The confusion and complexity that accompany extensive choices may actually hinder your investment portfolio. Fund supermarkets may argue that offering more products can help you build diversified, optimal portfolios. But when you have too many funds in your portfolio, it may start looking like an expensive index fund. Choosing from fewer funds doesn’t need to be limiting; we believe that you can create globally diversified, optimal portfolios through just a handful of well-picked products. Having curated investment options is a better solution - as long as they are provided by someone whose interests are truly aligned with yours.

Very very boring stuff

You were fairly confident with your hand after the turn and you raise. Now comes the river - but you didn’t quite get the card you wanted. Rationally - you know your odds of winning now are slim, unless you think your opponent is bluffing, but with all that cash in the pot, it’s hard to fold. Playing poker is a lot like investing - it’s a zero-sum game that commands discipline and an unknown future. The best poker players and investors are disciplined and don’t let emotions cloud their judgment.

"If investing is entertaining, if you're having fun, you're probably not making any money. Good investing is boring.”

- George Soros

TAKEAWAY OF THE WEEK

You were fairly confident with your hand after the turn and you raise. Now comes the river - but you didn’t quite get the card you wanted. Rationally - you know your odds of winning now are slim, unless you think your opponent is bluffing, but with all that cash in the pot, it’s hard to fold. Playing poker is a lot like investing - it’s a zero-sum game that commands discipline and an unknown future. The best poker players and investors are disciplined and don’t let emotions cloud their judgment.

We all think we are rational, but more often than not, we are led by our emotions. We are driven by optimism, euphoria, panic, and anxiety when we make investment decisions. This is why we need to have a disciplined investment strategy and invest regularly, rather than be affected by the noise in the market.

One of the simplest ways to be disciplined is through dollar-cost averaging (industry lingo). All you do is invest a predetermined amount of money into a predetermined portfolio at predetermined time intervals. An example: invest $1000 into a globally diversified low-cost index fund portfolio on a monthly basis.

As the portfolio fluctuates in value, you stay your course, buying the same $1,000 every month. As an arithmetic fact, you will buy less when the market is high and more when it is low. You reduce the risk of exposure to market fluctuations and your emotions.

This strategy also makes a lot of sense if you don’t think you have enough money to start investing now. One of the common misconceptions people have is that they want to put off investing until they have accumulated a “large enough” nest egg. This is bogus. The sooner you start building up an investment portfolio and the longer you stay invested, the more likely you are to reap the benefits and grow your wealth.

Dollar-cost averaging also takes away the temptation to time the market. We all flatter ourselves that we can buy low sell high, but our very unsystematic (and human) behaviour often leads many of us to do the exact opposite.